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Summary:

Headwinds to continue, Maintain Sell Blue Star (BLSTR) reported 3QFY13 sales of Rs. 5.9bn, a growth of 2.5% yoy, on the back of muted revenue growth across all three segments. Lowered qoq PAT of Rs. 53mn was due to continued weak margins in both EMP and cooling product segments. Order book contracted by 25% yoy to Rs. 16.3bn on the back of subdued order inflow during the quarter. While enquiries from select segment/sectors continue, delays in order finalization due to high interest rate environment, political issues, etc have led to reduced ordering for BLSTR. The management continues to remain selective while bidding for orders with increased emphasis on margins, payment terms and customer profile. Given the bleak inflow scenario and weak order book (1x FY13E revenue) we expect the EMP segment to de-grow by 4% and 7% in FY13E and FY14E respectively. The UCP segment de-grew by 5.1% (vs. 10% market de - growth) with subdued margins of 2.4% which was due to lower volumes and losses in sourcing of accessories (copper, insulation). Given the bleak order inflow outlook for the EMP segment, growth and margin pressure across segments, we reduce our earnings estimate for FY13E and FY14E by 7.9% and 3.7% respectively. While the management is concentrating on margin and balance sheet improvement which should gradually recover, the near term outlook remains uncertain. We maintain ‘Sell’. Highlights of the quarter’s performance and outlook EMP segment’s woes to continue – Execution pace in the EMP segment continued to remain subdued (7.6% yoy growth) with EBIT margin (5.8%) remaining under stress due to execution of old zero/low margin orders. While 60-70% of low margin orders have already been executed, ~Rs. 4-5bn of these order continue to remain in the order book and its execution is expected to keep margins under pressure going forward. Order book position (1x FY13E book-to-bill) has also weakened due to muted order inflow registered over the past few quarters. Weak execution pace and poor order inflow is expected to lead to revenue de-growth of 4% and 7% in FY13E and FY14E respectively High base effect lead to de-growth, margin outlook weak – Revenue in the UCP segment de-grew by 5.1% (market de-grew by ~10%) mainly due to a combination of sluggish demand environment for room A/Cs and higher base effect in 3QFY12 which was due to increased off-take on the back of change in BEE norms. Muted volume growth and continuation of losses in installation accessories in 4QFY13 would keep margins capped in the cooling segment Capital employed/debt levels to remain high – Capital employed in the EMP segment continues to remain high at Rs. 4.7bn and is expected to remain at elevated levels due to lackluster execution pace and payment delays. Debt levels are also expected to remain relatively higher at ~Rs. 4.0bn (FY13E) vis-à-vis Rs. 3.5bn expected earlier

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